ZURICH, 16 April 2019 - Swiss companies’ pension balance sheets started the year positively, offsetting part of the large losses made at the end of 2018. During Q1 asset returns were the strongest seen in 9.5 years, although discount rates plunged. Overall the illustrative funded ratio index (i.e. ratio of pension assets to pension liabilities) increased by around 1.8 percentage points, as shown by Willis Towers Watson’s Pension Index, which increased from 102.3% as at 31 December 2018 to 104.1% as at 31 March 2019.
The pension fund index of Willis Towers Watson’s Swiss Pension Finance Watch is published quarterly by the consultancy and is based on the International Accounting Standard 19 (IAS19). The index gives an indication of how the general funding position under IAS19 has changed from quarter to quarter, as opposed to giving the typical funding ratio of Swiss pension plans.
Surging asset prices more than offset the increase in liability values
General market sentiment in Q1 2019 was clearly in “rebound mode” following the dismal end to 2018. The result was the strongest asset returns seen in a single quarter for almost 10 years (7.2%, as represented by Pictet’s 2005 BVG-40 plus Index). The corresponding tightening of corporate bond yields, reducing by around 32 basis points in Q1 2019 to reach their lowest level since 2016, caused pension liabilities to increase by 5.4%. The combined effect of the increase in pension liabilities and the positive asset returns over the quarter lead to a partial recovery in the index following the dramatic fall that ended 2018.
The Pension Index measures the movement in the ratio of the assets to the defined benefit obligation of a sample pension plan (index level 100% on 31.12.2006).
The change in our pension index over the first quarter in 2019 is not dramatic in itself; what is interesting is the magnitude of the simultaneous increase in asset and bond prices. “The quarter was a rare example of when surging liabilities are completely covered by even stronger performing equities and bonds in typical pension portfolios. This is uncommon because bonds often increase when there is a ‘flight to safety’ while equities tumble in value. One thing’s for sure, it’s been a volatile couple of quarters.” comments Adam Casey, Head of Corporate Retirement Consulting at Willis Towers Watson in Zurich.
Searching for meaning amongst the numbers
The abrupt correction to the index in Q4 2018 ended over two years of improving funding positions. The question now is whether the recovery in Q1 2019 is a return to the positive trend in funding or was the blip in the previous quarter a warning of more troubled times ahead?
What is clear, is that central banks are wrestling to reduce the massive accumulation of debt that their relaxed monetary policies have caused. Up until recently, markets widely anticipated a steady tightening of interest rates, headed by the US Fed. However, the persistence of low inflation, weak growth prospects and the mini-crash in markets in Q4 2018, have cast doubts over a pick-up in interest rates in the near future.
“It would seem that the economic cycle has reached a turning point with the possibility of a recession moving closer as the IMF warns that the global economy has entered a global slowdown and the US treasury yield curve has inverted, which is an historical indication of an impending recession.” summarizes Adam Casey.
Importance of investing long term
The speed and magnitude of the opposing market moves over the last two quarters have caused significant debate and speculation as to what the swings mean. However, as Michael Valentine, Investment Consultant at Willis Towers Watson in Zurich states: “Pension funds are long-term investors and so need not be unduly concerned by short-term market “noise”. Thus, it is important that pension fund boards retain their focus on deriving and maintaining robust, diversified investment strategies. In this context we welcome the rapidly improving awareness of sustainable investment, which we see as a valuable complement to the portfolio construction toolbox, and a strong driver of superior risk-adjusted performance.”
Background information on the study
Swiss Pension Finance Watch reviews quarterly how capital market performance affects pension plan financing in Switzerland. The study is part of the Global Pension Finance Watch from Willis Towers Watson which includes results back to 2000 for major retirement markets worldwide. The results are published quarterly with a focus on linked asset/liability results. It covers pension plans in Brazil, Canada, the Euro-zone, Japan, Switzerland, the U.K. and the U.S.
The impact of capital markets on these pension plans is two-fold:
- Investment performance on fund assets
- Changes in economic assumptions on plan liabilities (as measured by international accounting standards)
Willis Towers Watson's model defines a benchmark pension plan that is intended to be representative of the pension liabilities and plan assets (including asset mix) that are typically found in each global market. The impact of movements in capital markets on assets and liabilities is combined to produce a Pension Index which reflects the movement in the funding level of the benchmark pension plan.
